Blame it on the millennials. No, I am not talking about the North Korean crisis, which I believe has to be solved by a sort of radical acceptance for the moment. No, I am talking about so much of the turmoil in this market and all the big moves I see occurring both up and down.
It's amazing how powerful this amorphous cohort is. Members, presumably born in the '80s and '90s but before the year 2000 are behind decisions that get made every day.
They are impossible to get away from. And I have to tell you that if it weren't for the fact that I have two millennial daughters I would hate this group that demands to be catered to or else they just cut you off at the knees, or the cord as may be the case.
First, let's define this group's bona fides. A millennial is someone everyone wants as a customer because tens of thousands of millennials per week are making decisions about their favorite brands and even for these fickle subjects, there is a degree of brand loyalty. That means, as Benno Dorer, CEO of Clorox (CLX) and one of the best marketers to millennials tells us, you need to advertise on the internet because that's where these people reside. That's why 45% of his ads go to the Facebooks (FB) , Amazon's (AMZN) and Googles's (GOOG) . Right now digital has more than television, about a 38% share. I think that Clorox is an harbinger of further share gains.
Second, perhaps because of low wages, perhaps because of gigantic student loans, this is a frugal group. They pay up for very little. In fact we have identified over and over again that they will pay a premium for just a handful of things: namely, Uber, Airbnb, the iPhone and make-up.
They do not want to pay up for cable because they like Netflix (NFLX) and Amazon so much and they can watch sports and all sorts of other programming on the better resolution iPhone, as we learned from the ATT (T) conference call which explained what people are watching.
These facts about millennials inform every decision. They are ineluctable. Today they inform one of the most tectonic shifts we have seen in entertainment, the one-two punch of Disney (DIS) going over the top with ESPN programming for a fee, and Disney ending a lot of its content relationship with Netflix, sacrificing hundreds of millions of dollars in fees.
Is this smart? Is it dumb? Or is it necessary. I think it is the latter because of the millennials. If they are not going to watch traditional cable like older folks, you have to come up with a package to reach them or be left behind. Disney's CEO Bob Iger knows that. He reported still one more weak quarter last night, away from theme parks and movies, and he has to change that if he is ever to have Disney return to growth. He's pushing a reset button here, betting that getting some of the millennials through internet TV is better than getting none of them from cable. He's right. And if you make it attractive enough with the super technology of BAMTech, which he just bought majority control over, it could be a win.
Why do the second, the Disney brand web site competitor to Netflix? Why not? He doesn't need the cash from Netflix -- said to be about $200 million a year -- as much as he needs independence from Netflix to help prove the worth of his company's content which, annually, is well in excess of that meager price. Disney bought back $2.4 billion of stock this quarter and $6.8 billion this year and is on track, the company said on the call, to buy $9 billion to $10 billion in stock.
But here's the rub. I think Disney should stop buying back stock and, instead, make sure they have the best possible over-the-top offerings to make it so they can command, say $10 a month from customers for sports and show the cable operators, and customer who take the cable offering that they are getting a bargain -- at least from the current ESPN which should be inferior to a BAMTech-presented ESPN with many more sports options. (I don't know how much they can possibly charge for the entertainment bundle given how little Netflix charges for everything including its homemade stuff that is so loved by, yes, millennials.)
The issues here, of course, are how long will it take to make all of this work and how fast do current ESPN subs drop because of cord cutting. I think it's a bit of a footrace but at least the narrative has changed from one of a pitiful helpless giant to one where you have one company that is a killer studio-theme park business -- by far the best and most lucrative in the world, are you listening Bob -- and another company that's a fantastic technology platform that delivers superior sports programming and, who knows, whatever else gets fed into it. If the latter company takes off, it could end up being an aggregator that could be ultimately be bought by the millennial beloved Facebook -- with no content costs at all or the sports-programming seeking YouTube of Alphabet fame. People don't see this split as a possibility because they don't watch BAMTech's MLB.com, which is the best website I use.It's fabulous on the millennially worshipped iPhone. If I were Iger, I would go right to Verizon VZ, Apple AAPL, ATT, whatever, and build the app right into the phone.
If Iger pulls this off, it will be huge. Either way it will showcase how strong theme parks and the studios are. I think the stock can go down until people get adjusted to the change, but a fabulous tech company that sells good content including sports would be a stock I would love to have, and Iger could create that in a year's time.
Now, keep in mind that the millennials fingerprints are everywhere, even in a down day. Este Lauder (EL) is the premier makeup company and it's on fire. Millennials. McCormick (MKC) , the spice company offered 5.5 million shares of stock at $90 to pay for its Frank's and French's purchase. The stock immediately went to $95. Mustard and hot sauce, with almost no calories, are the ideal condiments for millennials who are always looking their selfie-best. They are obsessed with looking good and feeling good. That's a big reason why my charitable trust owns Allergan (AGN) . The company's medical aesthetics business is just beginning to catch on with millennials. And its major depression formulation is something that is so necessary because of the millennials' frightening rate of suicide caused by depression.
The millennials love to stay at home and watch the internet while they snack and drink beer. That means the stocks of video game companies are still on a tear. Don't forget chips by Mr. Nvidia (NVDA) power them. You need Constellation Brands (STZ) , parent of Modelo and Corona and Pacifico, as it can still go higher. Same with Pepsico (PEP) , which has such fabulous organic growth because these couch potatoes can't resist Frito Lay snacks. And those who give up on Domino's (DPZ) may seriously regret it.
Of course, I would be remiss if I didn't mention that Amazon's stock remains the ultimate millennial play as these people really hate going to the mall. They like to order stuff though, so if you have a good e-commerce site and your stuff is sold in the mall you will do fine. It's why Adobe's stock (ADBE) stays high: you need to have something that attracts and keeps track of millennials on your internet.
Now it gets a little rockier when you think what they don't like. Their love for Uber and now Lyft is so intense that they aren't buying cars like they used to. I think they are starting to affect car sales. If they buy a car, they want it electric -- hence the love of Tesla (TSLA) and the hate of the traditional car companies -- because they care about the environment. That' s why the long-term prospects for oil and gas are so horrendous. And there's some great data from Home Depot (HD) that household formation is on the rise -- think millennial procreation if you can get your head around that -- which is why it is one of two large retailers with good stocks, the other being Walmart (WMT) which is the frugal place to shop offline.
Oh, and don't fret if you own Netflix. It's been preparing its own electric content for years, expecting this day to come, and with the exception of the possible cut off one day of Disney's Marvel which has the best characters on Netflix -- Luke Cage and Jessica Jones -- sorry Reed, I couldn't get through Iron Fist -- will do just fine.
So, the bottom line? Look for the fingerprints of the millennials. They are behind a plurality of every loved and spurned consumer stock out there and it's only getting worse, not better. Disagree? Ask Bob Iger, I bet he'd agree with most if not all of my analysis except he's probably buying the stock back for the company right here.